Investing in Uncertainty
By Johan Visser
With market conditions uncertain in the near term, if you want to invest in residential real estate, you should invest in ways to protect your overall portfolio. Reliance on capital gains may not be your short-term objective, so an investment needs to provide sound cash flows that make returns worth investing in the property. Make sure that you base your investment on the rental income to cover fixed costs, such as taxes, management fees, vacancies and maintenance, and that you are comfortable with the returns on that baseline.
In a potential economic downturn, property prices may not appreciate as they have in the last two years. To mitigate any long-term impact on the value of your investment, consider the following three items:
- You can create upside value by making key improvements.
- Rents may increase during an economic downturn.
- Buying a property that fits the most buyers can protect your investment.
Make improvements to a property
Consider investing in a residential property that isn’t move-in ready or that requires some changes. By fixing up that 1960s kitchen and the cast iron bathtub, you make the property more attractive to future tenants or buyers. Update wallpaper and paneling to give the dining room a fresh look.
Unfinished basement? You might hang some drywall and create a family room. No central air conditioner installed in the home? You can install the condenser and upgrade the HVAC system. Previous owner never installed that deck? Create an outdoor space with pressure treated wood now that lumber prices are decreasing.
We’re not talking about a major renovation to create a McMansion. Look for a property that shows upside with a minor refresh that won’t break the bank and that allows you to recoup your money and protect your investment in a prolonged downturn. Also, please make sure you check local building codes and apply for a permit if necessary.
Rents may increase
Yes, rents have increased during the pandemic, but consider this: with higher interest rates, people may not be able to buy the same size houses as they were before mortgage rate increases. Thus, if buyers want to live in larger houses, renting may be their best or only option. Our area’s real estate market doesn’t have many available rentals, so pressure to rent may continue and boost rental rates.
Short-term rentals may see more stress under an economy that has less discretionary money. Instead, maybe focus on long-term rentals. When evaluating tenants, make sure you do your credit and reference checks and respect NY law for application fees.
Overall, increases in rents will improve your returns and distinguish your investment in your portfolio.
Buy a property that fits most buyers
To protect your investment, focus on a property that can fit the greatest number of future buyers. Some examples include:
- A home that has a garage to keep the car clear of lake-effect snow;
- A home with no fewer than 3 bedrooms to allow for larger families rather than just a couple or a starter family;
- A property that you could convert to a multi-family for investor purchasers or a multi-family that you could convert to a single-family.
- A pool may have been THE thing to install during the pandemic, but pool maintenance is toilsome. Rather than spend your Saturday morning cleaning the pool, wouldn’t you rather go to your friend’s place and use his pool instead or visit one of our lakes? Not everybody likes the concept of a pool with our short summers.
The bottom line
You can make a sound investment by finding properties that likely will provide positive cash flow, have some potential for improvements, and appeal to the widest possible audience of future buyers. Good luck!
To discuss your objectives in property investment with your agent at Lake & Village Realty, visit our contact page. We look forward to helping you achieve your investment goals.